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					MERRIMAC INDUSTRIES, INC.

        1997 ANNUAL REPORT
                                                                                                                                 Selected Financial Data

                                                                                                                                                                                             1997*           1996                        1995                     1994            1993
                                                                                                                                 Net sales                                             $18,659,106       $14,152,970         $14,396,633                  $13,592,787       $14,252,309
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
                                                                                                                                 Operating income (loss)                                 1,995,145          (588,552)          2,308,549                    2,093,853         2,923,212
Report to Our Stockholders, Chairman’s Letter . . . . . . . . . . . . . . . . . . . . . . . . . 2-8                              Income (loss) before income taxes                       2,157,409          (491,252)          2,591,066                    2,268,196         3,080,988
Management’s Discussion and Analysis of Financial Condition                                                                      Net income (loss)                                       1,402,409          (297,252)          1,652,066                    1,431,196         1,983,988
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9-10                       Net income (loss) per share :
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11                             Basic                                                          $.91          $(.19)                         $.97                  $.82           $1.17
                                                                                                                                   Diluted                                                        $.87          $(.19)                         $.95                  $.81           $1.14
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
                                                                                                                                 Cash dividends per share**                                       $.30          $.40                           $.40                  $.40            $.30
Consolidated Statements of Stockholders‘ Equity . . . . . . . . . . . . . . . . . . . . . . . . 13
                                                                                                                                 Weighted average shares outstanding:
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14                              Basic                                                    1,539,421       1,549,218                1,700,422                   1,743,792      1,693,239
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 15-23                                Diluted                                                  1,618,339       1,575,515                1,730,889                   1,765,375      1,734,635
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23                             Working capital                                       $ 8,736,011       $ 7,958,440         $10,024,368                  $ 9,131,157       $ 5,869,746
                                                                                                                                 Total assets                                           15,559,804        13,081,765          15,188,512                   14,705,444        14,715,859
Quarterly Financial Information and Common Stock Data. . . . . . . . . . . . . . . . . . 24                                      Stockholders’ equity                                   12,802,831        11,129,022          13,368,883                   13,012,463        12,938,921
Directors, Officers, Key Staff and Corporate Data . . . . . . . . . . . . Inside Back Cover
                                                                                                                                  *All fiscal years presented herein contain 52 weeks, except fiscal year 1997 which consists of 53 weeks.
                                                                                                                                 **Quarterly cash dividends were eliminated in 1997 after quarterly dividends of $.10 per share were paid for the first three quarters of 1997.




                                                                                                                                                                    Net Sales                                                      Backlog
                                                                                                                                                                    (in thousands)                                                 (in thousands)
                                                                                                                                                          $20,000                                                        $10,000


                                                                                                                                                                                                                           8,000
                                                                                                                                                           15,000

                                                                                                                                                                                                                           6,000
                                                                                                                                                           10,000
                                                                                                                                                                                                                           4,000

                                                                                                                                                            5,000
                                                                                                                                                                                                                           2,000


                                                                                                                                                               0                                                              0
                                                                                                                                                                        ’95          ’96    ’97                                        ’95          ’96   ’97


                                                                            About the Cover:                                                                     Capital Expenditures                                              Research & Development
                                                                                                                                                                 (in thousands)                                                    (in thousands)
                                                                                                                                                           $2,000                                                           $600
                                                                            Recent developments in surface mount and
                                                                            multi-layer technologies position Merrimac to                                                                                                    500
                                                                            be a global leader in advanced communications                                   1,500
                                                                            systems such as GPS (Global Positioning Systems),                                                                                                400

                                                                            VSAT (Very Small Aperture Terminal) and ECM
                                                                                                                                                            1,000                                                            300
                                                                            (Electronic Countermeasures). Our focus continues
                                                                            to move towards re-engineering business processes,                                                                                               200
                                                                            value engineering, and global expansion of                                       500
                                                                            production and sales operations.                                                                                                                 100


                                                                                                                                                               0                                                               0
                                                                                                                                                                        ’95          ’96    ’97                                        ’95          ’96   ’97


                                                                                                                                                                                                                                          MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT   1
Chairman’s Letter




                                                                                            L-Band Mixer — front-end receiver




                                                               “         Our           performance                              represents the foundation
                                                                                                                                                                                   “
                                                                                                                                promising future...
                      Mason N. Carter
                                                    of a business model that has a
                                                                                                                                                                                                                         I&Q Network — military COTS
To Our Shareholders:                                                                                                                                                                                                    (commercial off-the-shelf) products



Our challenge for 1997 was very aggressive, when               The Highlights for 1997 were many, addressing the                      year ago continue to produce real progress and have        • Costa Rica Expansion and ISO 9002 Certification…
reflecting upon the Company’s history. I am very pleased       varied issues facing the business we inherited. A review of            made an immediate contribution to our business plan.         we moved to a 17,000 square-foot facility this January 1.
to report to Our Stockholders that the Merrimac Team met       the significant accomplishments should provide you with a                                                                           In addition to handling the growth and making a
and exceeded that challenge.                                   meaningful sense of the direction in which your Company                • Customer First…every co-worker on our Team                 significant contribution last year, the local Team
                                                               is headed. It is crucial to understand that what we have                 understands that the customer always comes first. We       obtained coveted ISO 9002 qualification.
This success goes far beyond the 32% increase in sales
                                                               accomplished is part of a process…not an end in itself.                  have observed some heroic efforts while demonstrating
after a dozen years of negative real growth. It goes
                                                               Focus and commitment are the central elements. Here                      our capabilities to our key accounts.                    • Empowered Co-Workers…in order to achieve our plans
beyond the important fact that we returned to profitability
                                                               are some of those process milestones:                                                                                               we need to optimize the power of our valued intellectual
and achieved a solid return on assets and equity. Our
                                                                                                                                      • From Job Shop to Life-Cycle Partner…the way to             property, our co-workers. With the creation of “Merrimac
performance represents the foundation of a business
                                                               Highlights of the Year                                                   convince our customers that we had changed was to          University,” we averaged during this year twenty-five
model that has a promising future, after so many years
                                                                                                                                        show them our greatly expanded capability. The result      hours of training per co-worker in West Caldwell and
of placing that future at great risk. The Goal of Profitable   • Focus on Driving-Force Issues…major positive changes
                                                                                                                                        is new incremental business never awarded in the past.     thirty-five hours in San Jose.
Growth gained great momentum last year supported by              have occurred in operations, marketing, culture and
the efforts and commitment of our co-workers.                    capital reinvestment. All of our initiatives outlined a


                                                                                                                                                                                                                                    “
                      “   The      Goal of Profitable Growth gained great momentum last                                         year supported by the efforts and commitment of our co-workers.



2    MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT                                                                                                                                                                 MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT   3
                                                                                      “
                                                                                    managed our working capital
                                                                                                  We
                                                                                                                                                                                                             “
                                                                                                                                                                                                           Image Reject Mixer — communications




                                                                          resources wisely and increased inventory turnover...
              14 Channel Filter Assembly — high-altitude application




• Creating Customer Value through Advanced Technology…                 • Commercial Satellite Concentration…business increased       • Major Account Penetration…we succeeded in                    • A Plan for the Future…a three-year strategic plan, the
  we designed twelve new products on our own initiative                  to record levels last year. While this is clearly a great     opening new key accounts and achieving increased               first in the Company’s history, was developed. This plan
  last year and are commercializing these currently. Our                 accomplishment, we have positioned ourselves to               sales to existing key accounts by targeting programs.          outlines the model for achieving our Goal of Profitable
  major technology development program will be announced                 attack this fast-growth market segment with cutting-edge                                                                     Growth. Every co-worker received a summary of the
                                                                                                                                     • Globalization…a great opportunity exists for us to grow
  and described later this year and is expected to provide               products and services.                                                                                                       plan, assuring a Company-wide understanding of,
                                                                                                                                       internationally. We have established Merrimac Europe
  broad, new core competencies and open new                                                                                                                                                           and encouraging a total commitment to, our future.
                                                                                                                                       Limited, based in London, and we expect it to be an
  high-growth market opportunities.                                    • Key Account Focus…refining our customer base from
                                                                                                                                       important contributor to our plans. We anticipate a
                                                                         1,000 diverse accounts to 75 key accounts allows us
                                                                                                                                       Pacific Rim presence in the near future. Our key accounts,   • Board Composition…appointing two new outside
• Increase in Market Segment Focus…as part of reinventing                to concentrate our resources on fast-growth customers.
                                                                                                                                       all multinationals, appreciate that we have a presence         members to our Board of Directors reflects our intent
  Merrimac, we are clearly defining which market                         Reaction from our key accounts has been positive and
                                                                                                                                       where they are doing business.                                 of having more independent directors.
  segments and niches to pursue vigorously.                              has rewarded us with a greater volume of their business.




                                                                              “          technology development program will be announced and
                                                                                 Our major
                                                                       described later this year and is expected to provide broad, new core competencies.
                                                                                                                                                                                          “
4    MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT                                                                                                                                                                   MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT   5
                        RF Microwave Market
                            (dollars in billions)


$21
                                                                            Wireless Communications
                       CAGR 16%
18
                                                                            Satellite
15
                                                                            Defense
12

 9
                                                                    Rapid growth in the RF microwave market offers
 6                                                                  Merrimac a large market penetration opportunity
 3

 0
          1997      1998       1999       2000       2001   2002




                                         “           We      strive to move beyond our


      During the year, our solid operating performance, together
                                                                       taking action to

                                                                     Moving the Process Forward…Challenges
                                                                                                                                comfort zone,
                                                                                                                                gain a market leadership position.

                                                                                                                                        Last year we began to focus on reducing our account
                                                                                                                                                                                                                              “
                                                                                                                                                                                              Phase Shifter — commercial telecommunications signal distribution network




                                                                                                                                                                                                           As our customers rationalize and right-size their businesses,
      with an additional assist from the elimination of the cash     and Opportunities                                                  base and we are implementing a fundamental discipline              while redefining their core competencies, Merrimac now
      dividend, provided the necessary cash flow to fund             The greatest challenges we face are staying current with           of customer intimacy. This is a proactive effort to respond        provides products, processes, and a customer-centered
      our investments in capital equipment, new product              the rapid pace of change, focusing on our plan, and                to customer needs through an in-depth understanding                business model that responds rapidly to changing
      development and co-worker training. We managed our             capitalizing on opportunities. These challenges involve            of their business. This transformation from the traditional        customer needs. Reaction to the new Merrimac has
      working capital resources wisely and increased inventory       our customer relations, technology changes, process                product sales approach has resulted in customer appreciation       brought earlier involvement in customers’ planning and
      turnover. We began the next fiscal year with a solid           refinements, competitive actions, economic conditions,             that translates into orders.                                       new business opportunities. We hear this theme from our
      cash position.                                                 and, most importantly, our own ability to execute.                                                                                    customers: “This is a different Merrimac and a much
                                                                                                                                        Supporting our customer-intimacy focus is a commitment             improved one.”
      On the financial front, a new $7 million revolving credit      Old paradigms are abandoned as we recognize that                   to technological innovation and process excellence.
      and term loan facility provided by our new banking             change is continuous and inevitable. We strive to move             Significant investments of time, effort and capital have           We are indeed a new and different Merrimac, but the
      relationship, along with earnings reinvestment, gives us       beyond our comfort zone, taking action to gain a market            enabled us to emerge as “product life-cycle partners” to           redesign is far from over. We are developing an infrastructure
      ample resources to fuel business expansion.                    leadership position.                                               our key account customers rather than as the “job shop”            based on simplified processes throughout the organization.
                                                                                                                                        resource of the past.                                              Key account customers receive comprehensive service within
                                                                                                                                                                                                                                    “
                                      “     Supporting our         customer-intimacy focus is a commitment                      to   technological innovation and process excellence.



      6     MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT                                                                                                                                                                       MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT   7
                                                                                 Ku-Band Bi-phase Modulator
                                                                            (patent pending) — satellite application




                   8-way Power Divider — base station



the required response time, coupled with the quality         Based on the Merrimac Team’s success in 1997,
and customization demanded. We are creating a company        the opportunity envisioned a year ago has been
that understands that the customer comes first, and we are   greatly enhanced, and we are positioning ourselves
committed, above all, to satisfy our customers’ needs.       advantageously.


Our Goal is Profitable Growth. Our objective is to satisfy   Thank you for your continued support and confidence,
our key account customers by committing our resources to
providing the best total integrated packaging solution,
while improving our value contribution with each new
                                                             Mason N. Carter
opportunity. Delivering on our objective assures us of       Chairman, President and
achieving our Goal.                                          Chief Executive Officer




“
Our objective is to satisfy our key account customers by committing our resources
to providing the best total                     integrated packaging solution.
                                                                                                     “
8    MERRIMAC INDUSTRIES, INC. 1997 ANNUAL REPORT
 Management’s Discussion and Analysis of Financial
 Condition and Results of Operations


1997 compared to 1996                                                1996 compared to 1995
Results of operations reflect increases in net sales of              In 1996 net sales were $14,153,000 compared to
$4,506,000 or 31.8% and operating income (before the 1996            $14,397,000 in 1995. Operations generated a loss of
restructuring charge) of $1,202,000 or 151%. Net income of           $589,000 in 1996. After excluding the $1,382,000
$1,402,000 compares to a net loss of $297,000 after the              restructuring charge recognized in 1996, operations
restructuring charge reported in 1996 and diluted net income         generated income of $793,000 compared to operating
of $.87 per share compares to diluted net loss of $.19 per           income of $2,309,000 in 1995. A net loss of $297,000 in
share in the prior year.                                             1996 compared to net income of $1,652,000 in 1995. The
                                                                     operating loss was primarily due to the increases in cost of
Net foreign sales amounted to $5,731,000 or 30.7% of net
                                                                     sales and selling, general and administrative expenses
sales, an increase of $1,341,000 or 30.6% compared to prior
                                                                     coupled with the restructuring charge.
year’s net foreign sales of $4,390,000. Net domestic sales
amounted to $12,928,000 or 69.3% of net sales, an increase of        Net foreign sales amounted to $4,390,000 or 31.0% of net
$3,165,000 or 32.4% compared to prior year’s net domestic            sales, an increase of $161,000 or 3.8% compared to prior
sales of $9,763,000. The increases in net sales were                 year’s foreign sales of $4,229,000. Net domestic sales
attributable to increased shipments of orders from a higher          amounted to $9,763,000 or 69.0% of net sales, a decrease
order backlog, process improvement initiatives, customer             of $405,000 or 4.0% compared to prior year’s domestic
service focus and reduction of total-cycle-time to market.           sales of $10,168,000. Management attributed
                                                                     approximately $200,000 of the decrease to the continued
Orders increased $3,457,000 or 20.7% to $20,186,000 in
                                                                     decline of net domestic defense activity.
1997 and the backlog of firm unfilled orders increased
$1,527,000 or 18.6% to $9,758,000 at year-end.                       Orders increased $1,776,000 or 11.9% to $16,729,000 in
                                                                     1996 and the backlog of firm unfilled orders increased
As a result of the increases in net sales, cost of sales increased
                                                                     $2,575,000 or 45.5% to $8,231,000 at year-end.
$1,707,000 or 20.7%. Cost of sales as a percentage of net
sales decreased 4.9% to 53.3% for 1997. The decrease in cost         Cost of sales as a percentage of net sales increased 8.1%
of sales as a percentage of net sales when compared to the           to 58.2%, which amounted to an increase of $1,032,000.
prior year is the result of volume-related improved efficiencies     The primary reasons for the increases were the loss of
in the manufacturing cycle, a higher concentration of                production time from Total Quality Management (TQM)
productive labor utilized in completing customer orders and a        and ISO 9001 quality standards program training and
reduction of non-productive labor associated with training and       implementation, as well as the setup costs for the new
instruction programs during the prior year.                          manufacturing facility in Costa Rica, which items in the
                                                                     aggregate were $811,000. In addition, higher
Selling, general and administrative expenses increased
                                                                     compensation rates due to the merit pay increases that
$1,675,000 or 33.2% and as a percentage of net sales
                                                                     became effective at mid-year 1995; additional
increased .4% to 36.0%. Increases in selling costs were
                                                                     manufacturing personnel hired to reduce the number of
related to higher sales commissions due to increased sales
                                                                     backlog ship days; the doubling of the matching
revenues. General and administrative expenses partially
                                                                     contribution rate by the Company to the Company’s
increased due to additional compensation expenses related to
                                                                     401(k) Plan; and fixed overhead increases not fully
the hiring of additional administrative personnel and higher
                                                                     absorbed because of a shipment shortfall impacted cost of
compensation expenses resulting from mid-year merit
                                                                     sales.
increases to certain employees. Certain transitional costs
associated with further restructuring and re-engineering also        Selling, general and administrative expenses increased
increased selling, general and administrative expenses.              $331,000 and as a percentage of net sales increased from
                                                                     32.7% in 1995 to 35.6% in 1996. The increases are due
Research and development expenses for new products were
                                                                     primarily to aggregate costs of $464,000 for TQM and
$556,000 for 1997, an increase of $309,000 or 126% from
                                                                     ISO 9001 training, instruction and implementation costs
prior year. The Company settled litigation relating to a 1992
                                                                     and a comprehensive marketing analysis utilizing an
acquisition claim and obtained a worldwide release for current
                                                                     outside consulting firm, as well as higher compensation
and any future claims of any nature arising from the utilization
                                                                     expenses resulting from 1995 mid-year merit increases to
of acquired technology. The cost of the settlement, including
                                                                     all employees.
expenses, was $122,000 and was charged to operations this
year.




    9   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Management’s Discussion and Analysis of Financial
Condition and Results of Operations


Liquidity and Capital Resources
The Company’s financial condition remained strong          The Company’s capital expenditures for new projects
throughout 1997. The Company had liquid resources          and production equipment are anticipated to exceed its
comprised of cash and cash equivalents (including          depreciation and amortization expenses in 1998.
investments in available-for-sale securities in 1996)      The Company recognizes the need to assure that its
totaling approximately $2,400,000 in both 1997 and         operations will not be adversely impacted by Year
1996. The Company’s working capital was                    2000 software failures. The impact on operations has
approximately $8,700,000 and its current ratio was 4.7     been evaluated and plans have been formulated to
at the end of 1997 compared to approximately               ensure Year 2000 compliance before the end of 1998.
$8,000,000 and 5.7, respectively, in 1996.                 Beginning in 1998, existing mission-critical software
The Company’s operating activities generated cash          will be revised to process dates for 1999 and beyond
flows of $1,621,000 in 1997 compared to $792,000 in        without any disruption to the business. Software
1996. Primary reasons for the increase in cash flows in    revisions will be performed by Company employees
1997 were increases in net income plus depreciation        and the total estimated cost for achieving Year 2000
and current liabilities which partly offset increases in   compliance has not been and is not anticipated to be
accounts receivable and inventories. Investments in        material to the Company’s financial position or results
property, plant and equipment were $1,800,000 in           of operations.
1997 compared to $1,003,000 in 1996. Proceeds from         The Company was authorized on November 1, 1996 to
the exercise of stock options were $593,000 for 65,400     purchase up to 100,000 shares of its common stock,
shares of common stock in 1997 compared to                 depending on market conditions, and has purchased
$286,000 for 36,300 shares in 1996.                        4,100 shares to date under such authorization.
The Company paid cash dividends of $459,000 in             Periodically, the Company explores the possibility of
1997 compared to $617,000 in 1996 at the quarterly         acquiring similar manufacturers of electronic devices
rate of $.10 per share. The Company issued a news          or companies in related fields, although it currently
release on August 28, 1997 regarding the Board of          has no definitive plans or agreements. Management
Directors review of its strategy for growth and            believes that any such acquisitions and business
relationship to its cash dividend policy. The Board of     operation expansion could be financed through its
Directors decision was to reinvest all future earnings     liquid and capital resources currently available as
in the Company and eliminate the cash dividend.            previously discussed and/or through additional
During 1996 the Company made open market                   borrowing or issuance of equity or debt securities. The
purchases of 154,100 shares of its common stock at a       additional debt from any acquisitions, if consummated,
cost of $1,630,000. No shares were repurchased in          would increase the Company’s debt-to-equity ratio and
1997.                                                      such debt or equity securities might, at least in the
The Company recently entered into a $7,000,000             near term, have a dilutive effect on net income per
revolving credit and term loan agreement with              share.
Summit Bank, at one-half percent below the bank’s          Certain statements in this annual report are forward-
floating prime rate. Up to $2,500,000 of borrowings        looking statements based on current management
may be used for capital expenditures under the term        expectations and are subject to risks and uncertainties.
loan. The full line is available for future borrowing      Factors that could cause future results to differ from
needs of the Company for working capital and general       these expectations include general economic and
corporate purposes.                                        industry conditions, competitive products and pricing
Management believes that with the liquid resources         pressures, risks relating to governmental regulatory
and the unused line of credit available, along with        actions in communications and defense programs, and
cash flows expected to be generated from operations,       inventory risks due to technological innovation.
the Company will have sufficient resources for             Additional factors to which the Company’s
currently contemplated operations in 1998. Expansion       performance is subject are described in the Company’s
of the Company’s manufacturing facility in Costa           reports filed from time to time with the Securities and
Rica, that became operational during the second half       Exchange Commission.
of 1996, is currently underway with completion
anticipated early in 1998.

 10    MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Consolidated Statements of Income



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
                                                                            1997         1996               1995
Net sales                                                              $18,659,106   $14,152,970       $14,396,633
Cost and expenses:
   Cost of sales                                                         9,947,774      8,240,639        7,208,152
   Selling, general and administrative                                   6,716,187      5,041,606        4,710,752
   Amortization of intangible assets                                                        77,568         169,180
   Restructuring charge                                                                 1,381,709
                                                                        16,663,961    14,741,522        12,088,084
Operating income (loss)                                                  1,995,145       (588,552)       2,308,549
Interest and other income, net                                             162,264         97,300          282,517
Income (loss) before income taxes                                        2,157,409       (491,252)       2,591,066
Provision (credit) for income taxes                                        755,000       (194,000)         939,000
Net income (loss)                                                      $ 1,402,409   $ (297,252)       $ 1,652,066
Net income (loss) per common share – basic                                    $.91           $ (.19)          $.97
Net income (loss) per common share – diluted                                  $.87           $ (.19)          $.95
Weighted average number of shares outstanding – basic                    1,539,421     1,549,218         1,700,422
Weighted average number of shares outstanding – diluted                  1,618,339     1,575,515         1,730,889
See accompanying notes.




 11   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Consolidated Balance Sheets



January 3, 1998 and December 28, 1996
                                                                               1997            1996
Assets
Current assets:
   Cash and cash equivalents                                               $ 2,414,725   $ 1,265,581
   Investments in available-for-sale securities                                            1,140,832
   Accounts receivable                                                       3,091,287     1,850,042
   Inventories                                                               4,508,569     4,165,818
   Other current assets                                                        173,203       271,810
   Deferred tax assets                                                         919,500       968,000
             Total current assets                                           11,107,284     9,662,083
Property, plant, and equipment, at cost                                     13,856,825    12,668,930
   Less accumulated depreciation and amortization                            9,663,081     9,326,688
Net property, plant and equipment                                            4,193,744     3,342,242
Deferred tax assets                                                             65,000        47,000
Other assets                                                                   193,776        30,440
            Total Assets                                                   $15,559,804   $13,081,765
Liabilities and Stockholders’ Equity
Current liabilities:
   Accounts payable                                                        $ 1,141,779   $     750,763
   Accrued liabilities                                                       1,193,669         952,880
   Income taxes payable                                                         45,825
             Total current liabilities                                       2,381,273        1,703,643
Deferred compensation                                                          375,700          249,100
             Total liabilities                                               2,756,973        1,952,743
Commitments and contingencies
Stockholders’ equity:
   Common stock, par value $.50 per share:
      5,000,000 shares authorized; 2,651,131 and 2,585,749 shares issued     1,325,566        1,292,875
   Additional paid-in capital                                                9,709,244        9,005,330
   Retained earnings                                                        10,995,086       10,051,720
   Unrealized holding gain on available-for-sale securities, net                                  6,162
                                                                            22,029,896       20,356,087
   Less treasury stock, at cost - 1,074,839 shares                           9,227,065        9,227,065
            Total stockholders’ equity                                      12,802,831       11,129,022
            Total Liabilities and Stockholders’ Equity                     $15,559,804   $13,081,765
See accompanying notes.




 12   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Consolidated Statements of Stockholders’ Equity



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
                                                                Additional   Unrealized
                                     Common Stock                  paid-in     holding       Retained      Treasury Stock
                                   Shares   Amount                 capital   gain (loss)     earnings     Shares    Amount
Balance, December 31, 1994        2,521,196     $1,260,598      $8,537,460   $(213,720) $9,989,697         830,735 $6,561,572
Net income                                                                                   1,652,066
Exercise of options                   28,256           14,128      164,364
Tax benefit - stock options*                                        21,300
Effect of change in fair
  value of available-for-sale
  securities                                                                   215,620
Cash dividends                                                                                (676,013)
Purchase of common stock                                                                                    90,004 1,035,045
Balance, December 30, 1995        2,549,452       1,274,726      8,723,124       1,900 10,965,750          920,739 7,596,617
Net loss                                                                                      (297,252)
Exercise of options                   36,297           18,149      268,206
Tax benefit - stock options*                                        14,000
Effect of change in fair
  value of available-for-sale
  securities                                                                     4,262
Cash dividends                                                                                (616,778)
Purchase of common stock                                                                                    154,100 1,630,448
Balance, December 28, 1996        2,585,749       1,292,875      9,005,330       6,162      10,051,720    1,074,839 9,227,065
Net income                                                                                   1,402,409
Issuance of stock options **                                        12,000
Exercise of options                   65,382           32,691      559,914
Tax benefit - stock options*                                       132,000
Effect of change in fair
  value of available-for-sale
  securities                                                                    (6,162)
Cash dividends                                                                               (459,043)
Balance, January 3, 1998          2,651,131     $1,325,566      $9,709,244         -       $10,995,086    1,074,839 $9,227,065
* Tax benefit resulting from the exercise and disposition of stock options and subsequent disposition of stock.
** Compensation expense, net of tax effects, from the issuance of stock options at a discount from fair market value.
See accompanying notes.




 13    MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Consolidated Statements of Cash Flows



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
                                                                            1997             1996          1995
Cash flows from operating activities:
   Net income (loss)                                                     $1,402,409      $ (297,252) $1,652,066
   Adjustments to reconcile net income (loss) to net cash
     provided by operating activities:
        Depreciation and amortization                                      953,705          890,859       850,637
        Loss (gain) on sale of available-for-sale securities                (65,006)         17,650
        Write-off of intangible assets                                                      244,500
        Deferred compensation                                              238,600          279,100
        Deferred income taxes                                               22,000         (473,000)       (47,000)
        Stock-based compensation expense                                    20,700
        Changes in operating assets and liabilities:
            Accounts receivable                                          (1,241,245)        523,139       (321,528)
            Inventories                                                    (342,751)       (245,808)      (272,180)
            Other current assets                                              98,607       (145,595)        74,685
            Deferred tax assets                                                (8,700)
            Other assets                                                   (163,336)          (2,178)      15,253
            Accounts payable                                                391,016         364,460        68,053
            Accrued liabilities                                             158,789          (32,397)     120,067
            Income taxes payable                                            186,325        (331,797)       52,871
            Deferred compensation                                            (30,000)
Net cash provided by operating activities                                 1,621,113        791,681       2,192,924
Cash flows from investing activities:
   Purchase of capital assets                                            (1,805,294)     (1,012,259)      (450,997)
   Proceeds from sales of capital assets                                      5,461           9,071          3,690
   Proceeds from sales and maturities of available-for-sale securities    1,340,454       2,272,070      1,292,983
   Purchase of available-for-sale securities                               (146,152)     (1,129,297)
Net cash provided by (used in) investing activities                        (605,531)       139,585        845,676
Cash flows from financing activities:
   Repurchase of common stock                                                            (1,630,448)    (1,035,045)
   Proceeds from the issuance of common stock                               592,605         286,355        178,492
   Payments of dividends                                                   (459,043)      (616,778)       (676,013)
Net cash provided by (used in) financing activities                        133,562       (1,960,871)    (1,532,566)
Net increase (decrease) in cash and cash equivalents                      1,149,144      (1,029,605)     1,506,034
Cash and cash equivalents at beginning of year                            1,265,581       2,295,186        789,152
Cash and cash equivalents at end of year                                 $2,414,725      $1,265,581     $2,295,186
Supplemental disclosure of cash flows information:
   Cash paid during the year for:
      Income taxes                                                        $675,000        $712,500       $833,776
Supplemental disclosure of non-cash investing activity:
   Unrealized holding gain on available-for-sale securities, less
      deferred tax provision of $4,200 and $143,000 in 1996 and 1995            -            $4,262      $215,620
See accompanying notes.




 14    MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
1. Summary of significant accounting policies
Principles of consolidation: The financial statements       Total inventories are net of valuation allowances for
include the accounts of the Company, Industrias             obsolescence of $1,533,000 in 1997 and $1,761,000
Merrimac Incorporada, S.A., a wholly-owned                  in 1996.
subsidiary located in San Jose, Costa Rica, and             Depreciation: Depreciation is computed for financial
Merrimac International, Inc. FSC, a wholly-owned            statement purposes on the straight-line method, while
foreign sales corporation. All intercompany accounts        accelerated methods are used, where applicable, for
have been eliminated in consolidation.                      tax purposes. The following estimated useful lives are
Cash and cash equivalents: The Company considers            used for financial statement purposes:
all highly liquid securities with an original maturity of
                                                            Land improvements                               10 years
less than three months to be cash equivalents. The
                                                            Building                                        25 years
Company maintains cash deposits with banks that at
                                                            Machinery and equipment                       3-10 years
times exceed applicable insurance limits. The Company
                                                            Office equipment, furniture and fixtures      5-10 years
reduces its exposure to credit risk by maintaining such
deposits with high quality financial institutions.          Assets under construction are not depreciated until
Because of their liquidity and short-term maturities, the   placed into service. Fully depreciated assets included
carrying value of these financial instruments               in property, plant and equipment at January 3, 1998
approximates their fair value.                              and December 28, 1996 amounted to $6,818,000 and
Use of estimates: The preparation of financial              $6,040,000, respectively.
statements in conformity with generally accepted            Long-lived assets: Effective December 31, 1995, the
accounting principles requires management to make           Company adopted Statement of Financial Accounting
estimates and assumptions that affect certain reported      Standards No. 121, “Accounting for the Impairment of
amounts and disclosures. Accordingly, actual results        Long-Lived Assets and for Long-Lived Assets to be
could differ from those estimates.                          Disposed of.” Under Statement No. 121, impairment
Contract revenues: Sales and related cost of sales          losses on long-lived assets are recognized when events
under fixed-price contracts are recorded as deliveries      or changes in circumstances indicate that the
are made. Prior to shipment, manufacturing costs            undiscounted cash flows estimated to be generated by
incurred on such contracts are recorded as work in          such assets are less than their carrying value.
process inventory. Anticipated future losses on             Impairment losses are then measured by comparing
contracts are charged to income when identified.            the fair value of assets to their carrying amounts.
Investments: The Company has adopted the provisions         During 1996, the Company determined that its
of Statement of Financial Accounting Standards No.          intangible assets, comprised primarily of the excess of
115, “Accounting for Certain Investments in Debt and        cost over the fair value of net assets of acquired
Equity Securities” and classified its portfolio of          businesses, had become impaired and estimated that
investment securities as available-for-sale securities.     they would not generate any significant cash flows in
Available-for-sale securities are carried at quoted         future periods. Accordingly, the carrying value of the
market values. Unrealized gains and losses are included     impaired assets of $244,500 was written off in
as a separate component of stockholders’ equity.            conjunction with certain other restructuring charges
Realized gains and losses, determined using the specific    (see Note 12). Prior to such determination, the
identification method, are included in income in the        intangible assets were being amortized on a straight-
period incurred.                                            line basis over a period of five years. The
                                                            implementation of Statement No. 121 did not have any
Inventories: Inventories are valued at the lower of
                                                            effect on the determination of the amount written off.
average cost or market and consist of the following:
                                     1997      1996
Finished goods                    $ 778,675 $ 885,863
Work in process                    2,571,426 2,134,013
Raw materials and
   purchased parts                 1,158,468 1,145,942
                                  $4,508,569 $4,165,818

 15    MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


 Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
 1. Summary of significant accounting policies (continued)
Advertising: The Company expenses the cost of                 Interest expense: Interest expense was not material in
advertising and promotions as incurred. Advertising           1997, 1996 and 1995.
costs charged to operations were $139,000 in 1997,            Net income (loss) per share: Effective January 3,
$150,000 in 1996 and $140,000 in 1995.                        1998, the Company adopted the provisions of
Income taxes: The Company uses the asset and liability        Statement of Financial Accounting Standards No. 128,
method to account for income taxes. Under this method,        “Earnings per Share,” which establishes the new
deferred tax assets and liabilities are determined based on   standard for computation and presentation of net
temporary differences between financial reporting and         income (loss) per common share. Under the new
tax bases of assets and liabilities, and are measured using   requirements both basic and diluted net income (loss)
the enacted tax rates and laws that will be in effect when    per common share are presented. All prior period net
the differences are expected to reverse. Valuation            income (loss) per common share information has been
allowances are established when necessary to reduce           restated.
deferred tax assets to the amount expected to be realized.    Basic net income (loss) per common share is
Savings and Investment Plan: The Company’s                    calculated by dividing net income (loss), less dividends
Savings and Investment Plan is a 401(k) plan (the             on preferred stock, if any, by the weighted average
“Plan”) that provides eligible employees with the option      common shares outstanding during the period.
to defer and invest up to 16% of their compensation,          The calculation of diluted net income (loss) per
with 50% of the first 6% of such savings matched by           common share is similar to that of basic net income
the Company. Company contributions to the Plan were           (loss) per common share, except that the denominator
$147,000 in 1997, $142,000 in 1996 and $105,000 in            is increased to include the number of additional
1995. The Board of Directors may also authorize a             common shares that would have been outstanding if
discretionary amount to be contributed to the Plan and        all potentially dilutive common shares, principally
allocated to eligible employees annually. Amounts             those issuable under stock options, were issued during
contributed to the Plan were $200,000 in 1997,                the reporting period (see Note 6).
$145,000 in 1996 and $288,000 in 1995.
                                                              Accounting period: The Company’s fiscal year is the
Stock-based compensation: Effective December 31,              52-53 week period ending on the Saturday closest to
1995, the Financial Accounting Standards Board issued         December 31. There were 53 weeks in fiscal year 1997
Statement No. 123, “Accounting for Stock-Based                and 52 weeks in fiscal year 1996 and 1995.
Compensation,” which permitted the Company to elect
to account for stock-based compensation arising under         2. Investments in available-for-sale securities
its stock option and stock subscription plans by using a      The amortized cost of the Company’s portfolio of
fair value based method or continuing to measure              available-for-sale investments in marketable equity
compensation expense using the intrinsic value method         securities at December 28, 1996 was reconciled to the
prescribed by Accounting Principles Board Opinion No.         fair market value, which was also the carrying value,
25, “Accounting for Stock Issued to Employees.” The           of the portfolio at December 28, 1996 as follows:
Company has elected to continue using the intrinsic
                                                                                                                 1996
value method and make the pro forma disclosures
required by Statement No. 123 of net income and net           Amortized cost                                 $1,130,470
income per share as if the fair value based method of         Gross unrealized gains                             10,876
accounting had been applied (see Note 6). Since the           Gross unrealized losses                              (514)
Company generally grants options and rights to                Fair market value                              $1,140,832
subscribe to purchase shares at or near the market price      The net unrealized gains of $10,362 in 1996 were
of the underlying share on the date of grant, it will not     included as a separate component of stockholders’
be required to recognize compensation expense as a            equity, net of deferred tax effects. Sales of securities
result of such grants.                                        totaled $1,275,000 in 1997, $2,275,000 in 1996 and
Research and development: Research and                        $993,000 in 1995. Realized gains in 1997 were
development expenditures of $556,000 in 1997,                 $65,000, and realized gains and losses in 1996 and
$246,000 in 1996 and $275,000 in 1995 were                    1995 were not material.
expensed as incurred.


  16   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995

3. Property, plant and equipment                           4. Accrued liabilities
Property, plant and equipment consists of the following:   Accrued liabilities consist of the following:
                                   1997           1996                                         1997         1996
Land and land improvements $ 547,446 $ 547,446             Commissions                      $ 152,871      $140,656
Building                     2,375,680 2,238,868           Vacation                            82,969       185,853
Machinery and                                              Savings Plan contribution          162,204       144,525
    equipment                6,169,081 5,850,630           Employee compensation              278,382       164,820
Office equipment,                                          Warranty reserve                   150,000       150,000
   furniture and                                           Deferred compensation              112,000        30,000
   fixtures                  4,764,618 4,031,986           Other                              255,243       137,026
                           $13,856,825 $12,668,930                                         $1,193,669      $952,880

5. Line of credit
The Company has a $7,000,000 unsecured bank line           credit agreement or any previous line of credit
of credit agreement with interest payable at one-half      agreements as of the end or during any of the last three
percent below the lending bank’s prime rate. There         fiscal years.
were no borrowings outstanding under this line of

6. Stock option and stock purchase plans
Under the Company’s 1993 Stock Option Plan,                equal to the closing price on the date the option is
300,000 shares of common stock were initially              granted. Such options are exercisable after the grant or
reserved for issuance. The 1993 Option Plan provides       at any time before the fifth anniversary of the grant.
for issuance of qualified and non-qualified options.       As of January 3, 1998, options for the purchase of a
The qualified options may not be issued at less than       total of 227,350 shares remained outstanding and
100% of the fair market value of the shares on the date    exercisable under the 1993 Option Plan, and options
of grant and they may be exercised at any time             for 16,550 shares were available for future grant. In
between one and ten years from the date of grant. The      addition, (i) qualified options for the purchase of a
non-qualified options may be granted to employees at       total of 4,962 shares remained outstanding and
an exercise price determined by the Stock Option           exercisable under the Company’s 1983 Key Employee
Committee of the Board of Directors which may not be       Stock Option Plan (however, options can no longer be
less than par value. Such options may become               granted under this plan); and (ii) non-qualified options
exercisable immediately after the grant and/or at any      for the purchase of 50,000 shares remained
time before the tenth anniversary of the grant.            outstanding and exercisable as a result of grants by the
The non-qualified options may also be granted to non-      Board of Directors in 1996 to non-employee directors
employee directors, provided the option price is at        at fair market value on the date of grant.
least




 17    MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
6. Stock option and stock purchase plans (continued)
A summary of all stock option activity and information related to all options outstanding follows:
                                               1997                           1996                        1995
                                      Weighted                      Weighted                    Weighted
                                        average         Shares         average        Shares      average         Shares
                                        exercise      or price        exercise       or price     exercise       or price
                                          price      per share           price      per share       price      per share
Outstanding, beginning of year              $9.76         181,612      $8.90       140,684        $8.59         54,527
Granted                                     12.32         156,400      10.97         64,500        9.00         97,000
Exercised                                    9.17          (47,400)     7.82        (20,572)       5.50          (3,493)
Cancelled                                    8.67           (1,400)     9.10          (3,000)      7.51          (7,350)
Outstanding at end of year                 11.24          289,212       9.76        181,612        8.90        140,684
Exercisable at end of year                $11.24          282,312      $9.76        181,612       $8.72         49,684
Option price range at end of year                    $5.50 -$15.00             $5.50-$11.00               $5.50-$10.88
Weighted average fair value of
  options granted during the year                           $4.71                     $1.98                      $2.88
The approximate weighted average of the remaining contractual life of outstanding options at January 3, 1998 was 8.8
years.
In 1995, the Company’s stockholders approved a stock          provides for issuance of Incentive Stock Options,
purchase plan pursuant to which 200,000 shares of the         Non-qualified Stock Options, Bonus Stock and
Company’s common stock were initially reserved for            Discounted Stock Options. Under this plan, the
sale to eligible employees. Under this plan, the              Company may grant
Company may grant employees the right to subscribe to         to employees who hold positions no more senior than
purchase shares of common stock from the Company at           mid-level management, discounted stock options for
85% of                                                        up to 100,000 shares of common stock, with the
the market value on specified dates and pay for the           option price per share of common stock to be at least
shares over a period of up to 27 months.                      greater than or equal to 50% of the fair market value
                                                              of the common stock on the date of grant. During
In 1997, the Company’s stockholders approved a long
                                                              1997, discounted stock options for the purchase of
term incentive plan (“LTIP”) pursuant to which 250,000
                                                              6,900 shares were granted at $14.00, a discount of
shares of the Company’s common stock were initially
                                                              $3.00 below the fair market value at the date of grant.
reserved for grant to eligible employees. The LTIP

A summary of stock purchase plan subscription activity follows:
                                                  1997                     1996                       1995
                                      Weighted                     Weighted                 Weighted
                                       average             Shares average            Shares  average          Shares
                                       exercise          or price exercise         or price exercise         or price
                                          price        per share       price      per share     price       per share
Subscribed, beginning of year            $8.66            18,274      $7.30        16,932      $7.01          43,442
Subscribed                               10.09            17,923       9.46        18,649
Purchased                                  8.82          (17,982)      7.98       (15,725)       6.43        (24,763)
Cancelled                                  9.70            (2,159)     8.70         (1,582)      9.24          (1,747)
Subscribed at end of year                $9.93            16,056      $8.66        18,274      $7.30          16,932
Subscription price range, end of year             $9.46-$10.09                $6.69-$9.46                $6.69-$9.24
Weighted average fair value of
   rights granted during the year                           $3.75                   $3.10


18   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
6. Stock option and stock purchase plans (continued)
The weighted average remaining contractual life of an          purchase plan subscription rights granted in 1997 and
outstanding stock subscription at January 3, 1998 was          1996, except for the discounted stock options granted
approximately one year.                                        in 1997.
As explained in Note 1, the Company has adopted the            The table below sets forth the pro forma net income
disclosure-only provisions of Statement No. 123.               (loss) and the pro forma diluted net income (loss) per
Accordingly, no earned or unearned compensation cost           share information as calculated in accordance with
was recognized in the accompanying consolidated                Statement No. 123.
financial statements for stock options and stock
                                                                                      1997       1996       1995
Net income (loss) - as reported                                                    $1,402,409 $(297,252) $1,652,066
Net income (loss) - pro forma                                                       1,212,409  (495,252) 1,395,066
Net income (loss) per share - as reported - diluted                                      $.87     $(.19)       $.95
Net income (loss) per share - pro forma - diluted                                        $.75     $(.31)       $.80
The Statement No. 123 method of accounting has not been applied to options granted in periods prior to January 1,
1995 and the resulting pro forma compensation expense may not be indicative of pro forma expense in future years.

The fair value of each of the options and purchase plan        options, which have no vesting restrictions and are
subscription rights granted in 1997, 1996 and 1995             fully transferable. In addition, option valuation models
was estimated on the date of grant using the Black-            require the input of highly subjective assumptions
Scholes option valuation model. For 1997, the                  including the expected stock price volatility. Because
following weighted average assumptions were utilized:          the Company’s employee stock options and
no dividend yield; expected volatility of 30%; a risk          subscription rights have characteristics significantly
free interest rate of 6%; and expected lives of five           different from those of traded options, and because
years. For 1996 and 1995, the following weighted               changes in the subjective input assumptions can
average assumptions were utilized: dividend yield of           materially affect the fair value estimate, in
3.4%; expected volatility of 25%; a risk free interest         management’s opinion, the existing models do not
rate of 6%; and expected lives of two years. However,          necessarily provide a reliable single measure of the fair
the Black-Scholes option valuation model was                   value of its employee stock options and subscription
developed for use in estimating the fair value of traded       rights.


7. Income taxes
The provision (credit) for income taxes consists of the following components:
                                                                                      1997         1996          1995
Current tax provision:
   Federal                                                                          $569,000      $214,000      $767,000
   State                                                                             164,000        65,000       219,000
                                                                                     733,000       279,000       986,000
Deferred tax provision (credit):
   Federal                                                                            17,000 (369,000)           (46,000)
   State                                                                               5,000 (104,000)            (1,000)
                                                                                      22,000 (473,000)           (47,000)
Provision (credit) for income taxes                                                 $755,000 $(194,000)         $939,000




19   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
7. Income taxes (continued)
Temporary differences which gave rise to a significant portion of deferred tax assets and liabilities at January 3, 1998
and December 28, 1996 are as follows:
                                                                                                      1997          1996
Current deferred tax assets:
   Inventory valuation allowance                                                                    $685,000      $755,000
   Depreciation and amortization                                                                                     17,800
   Capitalized inventory costs                                                                         87,100        69,600
   Warranty costs                                                                                      64,500        64,500
   Deferred compensation                                                                               12,900       131,300
   Other                                                                                               70,000        66,000
                                                                                                     919,500     1,104,200
Non-current deferred tax assets:
   Deferred compensation                                                                             196,800
Non-current deferred tax liabilities:
   Depreciation and amortization                                                                      (45,000)
   State income taxes                                                                                 (86,800)      (89,100)
                                                                                                       65,000       (89,100)
            Net deferred tax assets                                                                 $984,500 $1,015,100

The statutory federal income tax rate is reconciled to the effective tax rate computed by dividing the provision (credit) for
income taxes by income (loss) before income taxes as follows:
                                                                                 1997           1996             1995
Statutory rate                                                                   34.0%         (34.0)%           34.0%
   Effect of:
      State income taxes, net of federal income tax effects                        5.2           (5.2)             5.5
      Tax exempt dividends and interest                                             (.5)         (6.2)            (2.2)
      Foreign sales corporation income                                            (2.7)          (3.3)            (1.6)
      Foreign subsidiary losses                                                                   7.6
      Research and development credits                                              (.8)
      Other                                                                         (.2)          1.5               .5
Effective tax rate                                                               35.0%         (39.6)%           36.2%

8. Cash dividends
During 1997, the Company paid a $.10 per share                   Directors on August 28, 1997. The Company had
dividend in each of the first three quarters. The                previously paid dividends of $.10 per share in each of
dividend was eliminated by a decision of the Board of            the four quarters of fiscal 1996 and 1995.




20   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements


Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
9. Nature of business
Management considers the Company to be in one                  Accounts receivable are financial instruments that
business segment: the design, manufacture and sale of          expose the Company to a concentration of credit risk.
electronic devices offering extremely broad frequency          A substantial portion of the Company’s accounts
coverage and high performance characteristics. The             receivable are from customers in the defense industry,
Company primarily sells to customers in the                    and 30% of its receivables at January 3, 1998 were
communications, defense and aerospace industries.              from five customers. Exposure to credit risk is limited
Foreign sales amounted to approximately $5,731,000             by the large number of customers comprising the
in 1997, $4,390,000 in 1996 and $4,229,000 in 1995.            remainder of the Company’s customer base, their
Sales to any one foreign geographic area did not               geographical dispersion and by ongoing customer
exceed 10% of net sales for 1997, 1996 and 1995.               credit evaluations performed by the Company.
Sales to Lockheed Martin in 1997 and 1996 amounted
to 13.4% and 10.8% of net sales, respectively. No one
customer accounted for more than 10% of net sales in
1995.


10. Net income (loss) per common share
The following table summarizes the calculation of basic and diluted net income (loss) per common share for 1997,
1996 and 1995:
                                                                                    1997         1996          1995
Numerator:
Net income (loss) available to common stockholders                              $1,402,409    $(297,252) $1,652,066
Denominator:
Weighted average shares outstanding for basic net income (loss) per share         1,539,421     1,549,218      1,700,422
Effect of dilutive securities - stock options                                        78,918        26,297         30,467
Weighted average shares outstanding for diluted net income (loss) per share       1,618,339     1,575,515      1,730,889
Net income (loss) per share - basic                                                    $.91          $(.19)          $.97
Net income (loss) per share - diluted                                                  $.87          $(.19)          $.95
At December 30, 1995, there were 21,150 stock options outstanding excluded from the calculation of dilutive
securities because the exercise prices of the options were greater than the average market value of the common shares.




21   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
11. Commitments and contingencies
Lease commitments:
The Company leases real estate and equipment under       continuation of salary and health benefits for eighteen
operating leases expiring at various dates through       months upon termination of the agreement. In
December 2002. The leases include provisions for rent    addition, upon termination of the agreement, the
escalation, renewals and purchase options, and the       agreement provides for the commencement of a ten-
Company is generally responsible for taxes, insurance,   year consulting agreement for payments of $90,000
maintenance and repairs. Aggregate rental expense        per year including health, disability and death benefits.
charged to operations amounted to $54,000 in 1997.       The Company maintains a key-man life insurance
Rental expense in 1996 and 1995 was not material.        policy on the executive pursuant to the terms of the
Future minimum lease payments under noncancellable       agreement.
operating leases with an initial term exceeding one      The Company is party to a consulting agreement with
year are as follows:                                     a former Vice President, which initial term ends
         1998                $95,000                     February 2001 and automatically renews for successive
         1999                122,000                     twelve month periods thereafter unless otherwise
         2000                100,000                     terminated pursuant to the terms of the agreement.
         2001                106,000                     The agreement provides for an initial distribution
         2002                113,000                     valued at approximately $44,000 and minimum
Purchase obligations:                                    payments of $24,000 per year thereafter and includes
                                                         health and other certain benefits.
The Company has issued purchase order commitments
to processing equipment manufacturing vendors for        The Company is party to a retirement agreement that
approximately $900,000 of capital equipment and          became effective January 1997 with its former Vice
building improvements. The Company anticipates the       President, Secretary and Controller, which provides
equipment will be purchased and become operational       for annual payments of $30,000 for ten years.
during the second half of 1998.                          In connection with the consulting and retirement
Consulting and employment agreements; deferred           agreements described above, the Company recognized
compensation:                                            expense of approximately $239,000 in 1997 and
                                                         $279,000 in 1996. The Company accrues the present
The Company is party to an employment agreement
                                                         value of the estimated future payments over the
with its Chairman, President and Chief Executive
                                                         periods of the projected term of each of the respective
Officer. The agreement provides for a minimum
                                                         agreements. The minimum benefits payable in 1998
annual salary of $200,000 and the initial term ends on
                                                         are estimated to be $112,000 and the present value of
December 31, 1999 and automatically renews for
                                                         the estimated future consulting and retirement benefits
successive twelve month periods thereafter unless
                                                         payable beyond 1998 and accrued as of January 3,
terminated pursuant to the terms of the agreement.
                                                         1998 is approximately $376,000.
The Company is party to an employment agreement
                                                         Litigation:
with its Vice Chairman and Chief Technology Officer,
which initial term ends on December 31, 1999 and         The Company is a party to lawsuits, both as a plaintiff
renews from year-to-year thereafter unless otherwise     and a defendant, arising from the normal course of
terminated pursuant to the terms of the agreement.       business. It is the opinion of management, that the
The agreement provides for a minimum annual salary       disposition of these various lawsuits will not materially
of $180,000 and                                          affect the consolidated financial position or results of
                                                         operations of the Company.




22   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Notes to Consolidated Financial Statements



Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
12. Restructuring and related charge

The restructuring of engineering responsibilities        The Company initially recognized aggregate
and its attendant refocus of product lines during        restructuring charges of $1,822,000 in the third
1996 impacted the valuation of inventories. An           quarter of 1996 and charges, net of tax benefits,
additional review by management of inventories,          of $1,093,000. The Company reduced its estimate
certain intangibles arising from acquired product        of the total charges by $145,000 and reclassified
designs, a non-compete agreement and deferred            charges of $295,000 to cost of sales and selling,
compensation for a retiring senior officer resulted      general and administrative expenses in the fourth
in aggregate charges of $1,382,000, and charges,         quarter of 1996.
net of tax benefits, of $829,000 or $.52 per share to
operations in 1996.




     Report of Independent Public Accountants

To the Board of Directors and Stockholders
Merrimac Industries, Inc.

We have audited the accompanying consolidated            includes assessing the accounting principles used and
balance sheet of Merrimac Industries, Inc. and           significant estimates made by management, as well as
Subsidiaries as of January 3, 1998 and the related       evaluating the overall financial statement presentation.
consolidated statement of income, stockholders’ equity   We believe that our audit provides a reasonable basis
and cash flows for the year then ended. These            for our opinion.
financial statements are the responsibility of the       In our opinion, the consolidated financial statements
Company’s management. Our responsibility is to           referred to above present fairly, in all material
express an opinion on these financial statements based   respects, the financial position of Merrimac Industries,
on our audit. The financial statements of Merrimac       Inc. and Subsidiaries as of January 3, 1998 and their
Industries, Inc. and Subsidiaries as of December 28,     results of operations and cash flows for the year then
1996 and for the years ended December 28, 1996 and       ended, in conformity with generally accepted
December 30, 1995, were audited by other auditors        accounting principles.
whose report dated February 18, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit                       ARTHUR ANDERSEN LLP
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the            Roseland, New Jersey
financial statements. An audit also                      February 13, 1998



23   MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
       Quarterly Financial Information

Summarized quarterly financial data for 1997 and 1996 follows:

1997                                                         March 29              June 28     September 27                     January 3
Net sales                                                   $4,275,155           $4,986,288          $4,983,793             $4,413,870
Gross profit                                                 1,900,048            2,385,205           2,249,174              2,176,905
Net income                                                     277,746              378,100             350,015                396,548
Net income per share - basic                                      $.18                 $.25                $.23                   $.25
Net income per share - diluted                                    $.18                 $.24                $.21                   $.24
1996                                                         March 30               June 29    September 28       December 28
Net sales                                                   $3,187,345           $3,925,528      $2,997,905        $4,042,192
Gross profit                                                 1,548,312            1,767,288        1,068,489        1,528,242
Net income (loss)                                              252,303              312,949       (1,139,257)(A)      276,753 (B)
Net income (loss) per share - basic                               $.16                 $.20            $(.74) (A)        $.18 (B)
Net income (loss) per share - diluted                             $.15                 $.20            $(.73) (A)        $.18 (B)
(A) Reflects the effects of restructuring charges (see Note 12) which, as adjusted in the fourth quarter from those
    amounts originally reported in the third quarter, reduced net income for the quarter by $916,000 or $.57 per share.
(B) Reflects the effects of adjustments to restructuring charges (see Note 12) which increased net income for the
fourth quarter by $87,000 or $.05 per share.




       Quarterly Common Stock Data

                                                             1997                                                  1996

Quarter                                1st             2nd           3rd             4th        1st          2nd           3rd          4th
Market price per share:
  High                                                      1/16           3/4           7/8          3/8         3/8           3/8          3/8
                                     $12          $13               $19            $19         $11          $11           $11          $12
  Low                                      3/4              1/4            1/8                        1/8         3/4            5/8          3/4
                                      10               10            12             11          10            9             9            9
The common stock of the Company is listed on the American Stock Exchange and trades under the symbol MRM.
The market price per share information is provided with regard to the high and low bid prices of the common stock of
the Company during the periods indicated.




24     MERRIMAC INDUSTRIES , INC. 1997 ANNUAL REPORT
Directors, Officers, Key Staff and Corporate Data


Directors
           MASON N. CARTER                                     ALBERT H. COHEN                               Dr. JOEL H. GOLDBERG
            Chairman of the Board                               Asset Manager and                                  Chairman and CEO
             President and CEO                                 Management Consultant                               C.C.I. / SK Associates
           Merrimac Industries, Inc.                               Westfield, NJ                                         Union, NJ

         FREDERICK J. GUMM                                   EUGENE W. NIEMIEC                               Dr. ARTHUR A. OLINER
             Chairman and CEO                                   Vice Chairman and                               Engineering Consultant
        Frederick Gumm Chemical Co.                           Chief Technology Officer                    Professor Emeritus of Electrophysics
                 Kearny, NJ                                   Merrimac Industries, Inc.                   Polytechnic University, Brooklyn, NY

Officers
     MASON N. CARTER                       EUGENE W. NIEMIEC                    ROBERT V. CONDON                        BRIAN R. DORNAN
     Chairman, President and                  Vice Chairman and              Vice President, Finance and Chief         Vice President, Research
      Chief Executive Officer               Chief Technology Officer                 Financial Officer                    and Development

      RICHARD E. DEC                       REYNOLD K. GREEN                             JACOB LIN
    Vice President, Marketing                 Vice President, Sales             Vice President, Operations



Key Staff
 CHRISTOPHER CONNELLY              NORMAN R. HOLDEN              WALTER N. JOSWICK            STANLEY E. KECMER              JAMES J. LOGOTHETIS
   Director, Engineering         Director, Hi-Rel Services      Director, Engineering        Director, Info Services       Director, New Technology
   FRANK J. MACALUSO               JOSEPH McANDREW                    OLIVIA McKAY           LAWRENCE A. MICIAK             EDUARDO deM. ROBLES
        Controller                     Director,                     Director,                     Director,                  General Manager
                                 Manufacturing Processes          Human Resources                National Sales            Industrias Merrimac, S.A
    BARRIE A. SELWAY            EDWARD STELMASZCZYK              GEORGE C. TATORIS              NEIL S. THOMAS                  RONALD GOLD
 Director, European Sales              Manager,                      Director,                    Director,                       Director,
 Merrimac Europe Limited        Manufacturing Engineering     Manufacturing Operations         Quality Assurance            Materials Management




Corporate Data
Legal Counsel                          Annual Meeting                       Form 10-K                              Common Stock
                                                                            The Company’s Annual Report
Chadbourne & Parke LLP                 The Annual Meeting of                                                       The common stock of the
                                                                            on Form 10-KSB filed with the
30 Rockefeller Plaza                   Stockholders of Merrimac                                                    Company is listed on the
                                                                            Securities and Exchange
New York, NY 10112                     Industries, Inc. will be held                                               American Stock Exchange and
                                                                            Commission for fiscal year 1997
                                       at 10:00 a.m. on May 20, 1998                                               trades under the symbol MRM.
Auditors                                                                    is available upon written request
                                                                            to the Company:                        Investor Relations
Arthur Andersen LLP                                 at
101 Eisenhower Parkway                                                                                             NT Research Associates
Roseland, NJ 07068                     The American Stock Exchange           Corporate Secretary                   Manasquan, NJ 08736
                                       86 Trinity Place                      Merrimac Industries, Inc.             Phone: 732.223.3489
                                       New York, NY 10006                    P.O. Box 986
Transfer Agent                                                               West Caldwell, NJ 07007-0986          Stockholder inquiries
                                       Phone: 212.306.1000                                                         regarding change of address
ChaseMellon Shareholder Svcs.                                               Email: sec@merrimacind.com             and/or change of title should
85 Challenger Road                                                                                                 be sent to our registrar and
Overpeck Center                                                                                                    transfer agent, ChaseMellon
Ridgefield Park, NJ 07660                                                                                          Shareholder Services, shown at
Phone: 201.296.4000                                                         Internet: www.merrimacind.com          the far left.

				
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